There are two types of people in this world. One who lives to work and the other who work to live. If you are a person who belongs to the latter club, then you might be one of the overachievers who love what they do. They want to make more money and for that, they are ready to do anything.
If you are a person who lives to work, then you might be an underachiever who will be struggling to make your ends meet. If you really want to enjoy your life and live every moment of it to the fullest then, you should strive for financial independence.
If you want to achieve financial independence, you should never make financial mistakes that most people make.
In this article, you will learn about six stages involved in achieving financial independence and how they impact your progress towards your financial goals.
What is financial independence?
Wikipedia defines financial independence as, “Financial independence is the status of having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others.”
JD Roth, a famous personal finance blogger describes financial independence as “Financial independence occurs when you have saved enough to support your current spending habits for the rest of your life without the need to earn more money.”
Approaches to financial independence
There are two main approaches to financial independence.
- Accumulating Assets
- Reducing Expenses
How to achieve financial independence?
Here is how you can achieve financial independence.
- Live below your means
- Earn more money
- Cut back on items that you don’t need
- Save more money
- Only buy things you really need
Stages of financial independence
There are six different stages involved in achieving financial independence.
1. Solvency
During this stage, you can pay for your expenses on your own and don’t require financial assistance from any source.
The bad news is that you still must pay off bad debts. The good news is that your loans are not increasing.
Most fresh graduates who are looking for a job fall in this category. They still have student loans to pay off, but they are either looking for a job or have secured their first job which can help them to cover all their expenses.
As a result, they are no longer dependent on their parents.
2. Financial Stability
If you fall in this category then, you might have paid off a portion of your debt and can easily meet your financial commitments.
It might take a bit longer for you to get out of debt or pay off your mortgage but at least you are moving in the right direction. That is the stage where you start saving money.
You can create an emergency fund to cover up for expenses that pops up when you least expect them. As your saving starts to grow so does your progress towards the next stage which is debt freedom.
3. Debt Freedom
Once you have achieved financial stability and started saving money, you are in a great position to pay off debt. During this stage, your focus is on paying off all the debt you have and become debt-free.
Start off with high-interest loans because they are eating up on your savings faster. This is the stage when you are not only surviving but also thriving.
You no longer must worry about living paycheck to paycheck and your savings are growing slowly. You can even think about investing in some of this money.
4. Financial Security
As soon as you start putting your savings into investments, you start to see the return on your investments. You have to show patience because you won’t get rich overnight.
Slowly your short term and long-term investments start to bear fruit. When you start getting returns on your investments, you can get one step closer to achieving financial security.
Once you start generating enough returns from your investments which can cover your daily expenses such as housing expenses, food, and utilities, it is an indicator that you have reached the stage of financial security.
Keep in mind that not all your expenses are covered through the return you are earning on your investments.
5. Financial Independence
You achieve financial independence when you have enough money to cover up all your expenses and have enough investment returns that can help you sustain your current lifestyle for years to come.
This is the stage when you think about quitting your job and start doing things that you love to do. If you love to travel, you might go on a world trip and hop from country to country.
Always remember that financial independence is different for different people. For some with simple lifestyles, even $25,000 might be enough for the rest of their lives.
On the contrary, an extravagant person might need $50,000 to $80,000 before he or she can achieve financial independence.
6. Financial Abundance
The last and final stage is financial abundance. During this stage, you have enough money to cover up all the expenses and maintain your lifestyle for decades, not for years.
You might be earning substantial revenue from your investments which allows you to invest the surplus amount into more lucrative investments such as buying a real estate property or investing in new businesses.
Instead of thinking about money management, you start thinking about asset management at this stage. You not only have covered your lifetime expenses but also have enough money left behind for your kids.
Conclusion
Achieving financial independence is a step by step process and you can never achieve financial freedom quickly. You will have to go through different stages from solvency to financial abundance. It is like a ladder that you have to climb one step at a time before you can reach the top.
How do you achieve your financial goals? Feel free to share it with us in the comments section below.
Irfan Ak is a digital marketing strategist at Toronto’s web design company & a guest blogger on various websites. He is a passionate digital strategist. He has worked with various other brands and created value for them.
